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Fed Rejects Bank of America’s Dividend Plan

By Ben Protess March 23, 2011 8:23 amMarch 23, 2011 8:23 am

Jin Lee/Bloomberg News

12:59 p.m. | Updated

Bank of America revealed on Wednesday that the Federal Reserve had rejected the bank’s plan to increase its dividend in the second half of 2011, even as it agency has permitted dividend increases at several other big banks.

Regulators raised objections as part of the second round of bank stress tests, the results of which came out on Friday. Bank of America, the nation’s largest bank holding company, says it will take a second stab at persuading the Fed to ease its grip on the firm.

The bank said it had originally submitted its dividend intentions to the Fed in January. The company outlined a proposal to maintain its current payout — a token penny a share — for the first two quarters of the year, and then institute a “modest increase” later this year, according to a regulatory filing on Wednesday.

But the Fed scuttled Bank of America’s plans on Friday. Analysts say the Fed’s concerns likely centered on Bank of America’s mortgage business, which is plagued by uncertainty as investors want the bank to repurchase billions of dollars in soured mortgage securities.

“Nobody can really calculate” the risk Bank of America faces on the mortgage claims, said Chris Kotowski, a bank analyst with Oppenheimer, adding that it is “uncharted territory.”

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It also remains unclear exactly how Bank of America will tweak its proposal, but bank officials still have their sights set on a slight dividend increase.

“The corporation will continue to work with the Federal Reserve and intends to seek permission for a modest increase in its common dividend for the second half of 2011, through the submission of a revised comprehensive capital plan to the Federal Reserve,” the bank said in the filing.

Shares of Bank of America were down 36 cents, or 2.59 percent, at $13.52 on Wednesday morning.

Bank of America said it planned to rework its dividend proposal in the coming months, most likely by the end of June. The bank is said to be in regular conversations with the Fed, in hopes of hammering out a compromise.

Analysts originally expected the bank to raise its quarterly dividend by 5 cents to 8 cents — roughly 20 percent of its anticipated earnings for the remainder of 2011. That would be in line with other bank payout plans, which regulators are aiming to cap at 30 percent of earnings.

The banking industry lowered – or in the case of Citigroup, halted — their payouts to investors at the height of the financial crisis.

After the recent stress test scores came out, other big banks moved swiftly to lay out plans to raise their dividends and buy back stock — all with the blessing of the Fed.

Several big banks quickly announced proposals to reward shareholders on the heels of the Fed’s announcement. JPMorgan said it would buy back stock worth $15 billion and raise its dividend in the second quarter to 25 cents a share, up from 5 cents. Once Goldman Sachs got the all-clear from the Fed, the bank moved to payback the $5 billion it received from Warren E. Buffett at the peak of the crisis.

Even the beleaguered Citigroup made a symbolic gesture, saying on Monday that it would start paying a penny a share to investors. Most analysts had expected that Citi would not increase its dividend until 2012.

But Bank of America remained silent on the Fed’s ruling until Wednesday. Many analysts had speculated that the bank’s dividend would rise in the second half of the year — and that still could happen if the Fed approves the bank’s revised plan.

The bank in recent months has proclaimed that it has shored up its balance sheet in the wake of the crisis. Bank of America, in the regulatory filing on Wednesday, said its Tier 1 capital had increased to 8.6 percent at the end of 2010, up from 7.1 percent at the end of 2009.

Bank of America “is financially stable enough to pay a dividend, but clearly you can’t put them on the same footing as JPMorgan or Goldman Sachs,” said Mr. Kotowski, of Oppenheimer

The bank’s capital levels, although relatively strong, lag behind some competitors, according to Jefferson Harralson, an analyst at Keefe, Bruyette & Woods.

“They’re just behind,” Mr. Harralson said. “It makes sense to be a little more careful.”

The claims over Bank of America’s mortgage-backed securities also loom large.

The bank paid more than $2.5 billion last year to buy back troubled mortgages sold to Fannie Mae and Freddie Mac, the government-controlled mortgage finance firms. Private investors are also demanding the bank repurchase mortgage securities, saying the underlying loans did not conform to underwriting standards. Many of the mortgages were originated by the subprime lender Countrywide Financial, which Bank of America acquired in 2008.

Bank of America lost $2.24 billion in 2010, largely because of expenses stemming from its takeover of Countrywide.

Although the bank’s shares dropped on Wednesday, some investors expressed support.

The Fed’s decision “doesn’t dissuade us from continuing to build positions in BofA,” said Marshall Front, chairman of Front Barnett Associates, a Chicago-based investment manager.

“It is a setback in the progress they’ve made,” Mr. Front said. But “I don’t think this changes their longer-term plans.”